When it comes to saving money, there are two ways to skin the proverbial cat: Earn more income or cut expenses.

The option you choose depends on whether you’d rather reduce spending or work harder to pay for that spending. Both approaches will put you further ahead financially, and – if you’re serious about piling up some cash – you could buckle down and do both.

However, if you had to pick one, which is the better way to get ahead? Let’s look at the pros and cons of each to find out.

Pros of Earning Extra Income

Many people prefer the idea of earning more money as opposed to cutting they’re spending. After all, the idea of cutting back one’s lifestyle doesn’t appeal to most people. Plus, when asked if they spend money wisely, many people would agree that they already do.

Most people want to earn more money – Who wouldn’t want to increase their income? Duh! Making more income means a person has more money to spend or save. Although getting a second job is always an option, you might want to consider trying one of the best work from home jobs instead.

Plan B in case of a job loss – Taking on a side gig to earn extra income can also be a good fallback plan in case you lose your job. One never knows when they may be blindsided by a job loss, and having another way of bringing home some income is a great way to survive until you get back on your feet.

Discover a better way to earn an income – Sometimes a side gig can turn into full-time gig. That’s what happened to us. The income that we make from our blog is far more than we ever made working a full-time job. Plus, we get to be our own boss and work on our own terms.

Control over how much money you earn – Want to make an extra $100 a week? No problem! With a side gig, you get to decide how much extra income you want to make and when you want to earn it.

Chance to try out a side hustle idea – Have you always wondered if you would like freelance writing or being a dog walker to earn extra income? Rather than quit your regular job, why not try the side gig you’ve always wondered about and see if it’s a good fit? You might find something you love doing without risking your day job to try it out. Who knows? It could even take your life in a whole other direction like it did for us.

Wipe out some debt – Wouldn’t it be great to kill some debt with the extra money you earn? Or, maybe you need some extra cash for the home renovations or trip you’ve been dreaming of? Starting a side job could help you save enough money for those things before you know it!

Cons of Earning Extra Income

Too burned out from your regular job – The idea of working more in addition to a full-time job can be overwhelming for some people. If you are already burned out from your day job, a side gig may be out of the question.

No spare time – Let’s be honest: Working a side gig requires time which you may be unable (or unwilling) to give up. If you have children or other family commitments, such as caregiving for an ill family member, a side gig may not be feasible.

Pros of Cutting Expenses

One of the easiest ways to start saving money is to spend less of it.

Control over consumption – If you’d like to gain some control over the consumption monster in your household and have more money left over at the end of the month, cutting expenses is definitely the way to go. Most people want to make more money because there’s always more “things” they want to buy. However, when is enough enough? People are often surprised to find that they are just as content spending less money rather than more.

Less moneywasted – Regardless of how much money you make, you work hard for it. So, letting it go to waste shouldn’t be acceptable. By taking a hard look at your expenses, it quickly becomes obvious where you’re spending well and where you’re basically flushing it down the drain on things that don’t really matter to you.
Some of the most common spending traps are gym memberships you don’t use, cable TV, landline phones, huge cell phone bills and data plans, and eating out rather than cooking at home.

More control and more time – The most important benefit of cutting expenses is that you need less money to live. Having fewer expenses may allow you to cut back to part time work, stay home with your children, or free up time to pursue a hobby. When you live on less, it frees up more time to do things other than work. You might even find that your time is much more valuable than making a few extra bucks to spend on junk you don’t really want anyway.

Cons of Cutting Expenses

Nothing left to cut back on – If you’re already living on a bare-bones budget, cutting expenses even further may not be possible. Everyone needs a certain amount of money to live, and – if there’s no fat left to trim – you may have to look for ways to make more money instead.

Unnecessary suffering – If you are already extremely diligent about spending your money wisely, cutting expenses even further may cause unnecessary discomfort. However, this is rarely the case. You must be honest with yourself. Are you struggling to meet legitimate expenses or are you simply spending too much? If you’re couch-surfing because you truly can’t afford a place of your own, cutting expenses may not help much. If you struggle to make the rent because you eat out 10 times a week, it’s time to change your habits.

So, is it better to earn more or spend less? Honestly, a combination of both is typically the most effective attack.

By spending less and making more, you’ll be able to quickly beef up your monthly savings. Your long-term savings will also improve because you’ll be able to live on less.

How do you prefer to save money? Which of these options do you think is best?

Passive income is the best income. I frequently argue this case to the readers of my personal finance blog. Passive income is money that comes my way based upon work that I’ve done in the past. It might come from an article or a blog post that I wrote years ago, or it might come from a dividend-paying stock that I bought a couple of months ago. It comes in whether I decide to work hard on a given day or I choose to sleep in and watch a football game. Most people think that more work is required for additional income, but passive income requires no additional effort on my part. This is why I think passive income is the best type of income to have and I want to build it up over time. When thinking of passive income and how to increase it, I’ve decided that dividend income is the best passive income. Here are four reasons why I’ve come to this conclusion.

1. Dividends Are A Solid Component Of Return On Capital

When many people think of investing in stocks, they don’t really have investing in mind. They tend to picture greedy men in suits running around on Wall Street or day traders sitting in their living room who try to make quick trades to cash in capital gains. This is trading in the best-case scenario and speculating at worst. People who are actual investors find a company that they like that has solid revenue and income streams. They generally intend to hold a stock for the long run. Warren Buffett, possibly the greatest investor ever, argues that his ideal holding period is forever. Investors understand that the stock of a company they choose might go up $2 one day and down $4 the next. In a recession, most stocks will get hit. This does not mean that the underlying fundamentals of a given company are necessarily bad. It could just mean that stocks are on sale.

Many companies that make a nice level of income over time decide to pay a portion of their profits back to investors in the form of a dividend. This is actual cash that can be used in any way a shareholder might decide, and depending upon the amount of the dividend and any growth in that dividend over time, an investor could actually see all of their original capital returned to them, and then some. This all happens while the investor continues to own a portion of the company. If the company has the growing revenue and income over time that is necessary to support a growing dividend, it’s also likely that the price of the stock will appreciate. This is a win-win situation for the shareholder.

2. Dividends Can Usually Be Reinvested Easily

There are basically two ways that an investor who decides to reinvest dividends can do so. The first option is to sign up for a dividend reinvestment program, otherwise known as a DRIP. A DRIP buys additional shares in the company that paid out the dividend. For example, a hypothetical company might have a share price of $100 and a quarterly dividend payment of $1. For every 100 shares that an investor holds, he or she would get one additional share the first quarter. An investor with 50 shares would receive one-half of a share. This process is usually available for those who buy shares directly from a company, but it is also available through many brokerages. Charles Schwab, Fidelity, and TradeKing are just three of the online discount brokerages that allow for DRIPs. All that the investor has to do to DRIP is inform the company or brokerage that they want to. There might be a request form, but it’s usually a pretty painless process.

The second option for those who want to reinvest their dividends is to collect dividends from all companies that they own and then make a purchase when the pool of dividend payments gets to a certain pre-determined level, be it $500, $5,000, or anything in between. They could also choose to jump on a great company at a great price if the opportunity arises before reaching the ideal amount of pooled dividends. This reinvestment can go toward a company that the investor already owns, or it can go toward diversifying into a new company. Regardless, it is a deployment of new capital that can bring more passive income over time. In the interest of full disclosure, I’ve used both of these methods for reinvestment at different times. I’m currently pooling my dividends, rather than allowing them to automatically reinvest into the company that paid them, but I am not fundamentally opposed to DRIPs.

3. Dividends From The Right Companies Can Grow Over Time

There are several publicly traded companies that have grown their dividends for 25 years or longer. Even better, there are a few that have a dividend growth record of at least 50 years. Both Johnson & Johnson and Coca-Cola have grown their dividends every year since the Kennedy administration. Getting a dividend increase each year is essentially getting a raise on your passive income that will oftentimes exceed the amount of any raises your regular employer will give you. When trying to find a solid dividend growth company, it’s a good idea to look at metrics like income growth, revenue growth, and dividend payout ratio (the percentage of profit that’s paid out to investors). Growing income and revenue are good signs. A relatively low dividend payout ratio is a good sign, as well. I’ve seen investors who want a ratio of below 50 percent. Others are comfortable with a payout ratio of 80 percent. Regardless, lower payout ratios are generally better.

4. The Combination Of Reinvestment And Dividend Growth Can Lead To A Compounding Stream Of Passive Income.

Putting dividend growth and reinvestment together can lead to a supercharging of your passive income stream. Reinvesting a dividend effectively increases your dividend payment by the current yield. For example, if the current yield is 4 percent, an investor who initially had 100 shares would have slightly more than 104 shares after a year (because of compounding), and the dividend payment for the next year would be more than 4 percent higher (and growing because of compounding). After two years, she would have more than 108 shares, and so on. This example assumes a stable dividend and share price. Dividend income would double in about 18 years in this scenario based upon the rule of 72.

When the dividend grows, however, the passive income stream would increase even more rapidly. With the example given above, the dividend yield and the rate of the dividend increase would get added together to calculate the overall increase in dividend income on a year-over-year basis. The 4 percent dividend yield, if combined with a 6 percent increase, would effectively lead to a more than 10 percent increase over the course of a year (keep in mind that compounding is in play every time a dividend gets reinvested). If this process could continue for about 10 years, based upon the rule of 72, our hypothetical investor would see his income grow from $100 to roughly $200. This all happens with no new investments outside of reinvested dividends, which is why I believe dividend income is the best passive income.

Caveats and Concerns

While I firmly believe that dividend income investing is a great way to build wealth over time, investors should perform due diligence when putting available capital toward equities. Dividend cuts definitely happen, and from time to time dividends are suspended altogether. Companies can also go belly up. These are all risks that come with investment although diversifying across companies that have solid financials and reasonable payout ratios can limit the possible risk and make it more likely that a dividend investor can succeed over the long term.

Disclosure

This article is intended for educational and informational purposes and is not intended as a recommendation to purchase any particular investment. Be sure to perform due diligence before putting money toward any investment.

It’s been a little while since I last wrote one of these updates. January of 2015 to be exact. Needless to say, there have been a few changes in my peer-to-peer investing in the last year and a half. One of the biggest changes, I’ll talk about below. First, let’s see where my peer-to-peer investing was when we last looked at it. (You can read the full post here, or just read the recap below.)

Peer-to-Peer at EOY 2014 (Recap)

The biggest change in my Lending Club account at the end of 2014 was the NAR (which is an adjusted rate of return) had dropped from a little over 13% in 2013 down to 9.61% at the end of 2014. Despite the drop, I felt like that was a pretty good rate of return, and reason enough to continue to invest in peer-to-peer lending.

Two other factors that I looked at were default loans and interest received. In 2014, there were 4 loans that had gone into default. There had been only one in 2013, but with an increase in investing on my part, the rise was somewhat expected. The total principle written off in 2014 was $41.87. Total interest minus fees for 2014 was $115.69. Take out the written off principle and you still get income on 2014 of $73.82. Again, not a bad little bit of semi-passive income.

Peer-to-Peer in 2015 and the first half of 2016

So, it’s been a year and a half since I last shared one of these updates. First, let me do a bit of a quick overview of where the account sits now, and then I’ll share some changes that have had some effect.

Peer-to-Peer income

Is Peer-to-Peer Investing Worth Your Time?

I like talking about the income (and resulting rate) first. Why? Because that’s the meaty money part of it. 🙂 And I like money. At the end of 2014, my NAR was 9.61%. Here we are in August of 2016, and my NAR is currently showing at 9.89%. It’s gone up! I love when that happens! There’s a couple of factors that likely have helped with that. The first is that there haven’t been any defaults since 2014. Right now, there are 3 loans that are threatening. 1 that’s in that nasty 31-120 days past due category. Typically, if they get that far, they’re as good as defaulted. We’ll see, but I fully expect that loan to go into default in the coming months. The other 2 are split between the Grace Period and 16-30 day categories. More often than not, those loans tend to come back to the current status. Having them default could eat into the income for 2016, but that’s one of the risks we take in investing for higher returns.

Peer-to-Peer Income 2015

2015 was a bit of an odd year. I didn’t pay nearly as much attention to the Lending Club account as I should have, and so, often when I would log in, I would have quite a bit of my portfolio sitting around doing nothing in the cash account. At one point, I had about 40% of the entire account sitting in cash because I hadn’t done anything with it in a while. That doesn’t equate to good income. For 2015, the interest minus fees only totaled up to $103.07. Down from 2014, but purely reflective of my inactivity in reinvesting the cash. The upside to 2015 was the lack of defaults. Because there weren’t any defaults, the income minus written off loans was still 103.07. That’s better than 2014, so even though my inactivity caused a reduction in gross income, it also may have sheltered me from defaults and thus preserved more of the income.

I’ve been a bit more active in 2016, and my income reflects it so far. As of the end of July, interest received minus fees was at $72.04. If that trend continues, 2016 will be slightly better than 2014. One of my goals when beginning this account was to achieve $10 per month in income. At this point, I’ve done that. I just have to remain active in reinvesting the funds in order to maintain that level. Next goal, $20 per month!

Peer-to-Peer Changes

One of the things that I wrote about in my “How I Invest” article was how I wasn’t eligible to directly invest or borrow because of the state that I lived in. Probably the most significant change since the end of 2014 is that my state is now eligible for both. I haven’t toyed with the borrowing side, but I have touched the direct investment side. My experience there is mixed. One of the things I like about it is that you aren’t paying any fees or premiums on the investments that you’re buying. That means you make more money over the life of the loan. That’s good. The downside, to me, is the delay in investment.

Direct Investing vs. Trading Platform

If you’re unfamiliar with how the direct side works, you basically go in and choose which loans to invest in. You’ve got some ability to filter, but not all the same ones that you have on the FolioFN site. Once you select some loans, you press the invest button. Here’s where the delay comes in. The loan only gets investing if it gets fully funded. So, if you invest in a loan early in the process, you could be waiting a while before there’s enough investor commitment to fully fund the loan. Once the loan is fully funded, it goes through a vesting process. The folks at Lending Club look it over, make sure everything is what it is supposed to be, and then the loan finally gets funded. And then you wait until the next pay date. All told, you’re money could be sitting in a committed status for a week or more waiting on all of those steps. Or, you could pay a small premium (you can filter based on the premium) on the FolioFN trading site and have your investment in your portfolio the next day.

After playing with the direct side, I can see myself using it occasionally, but really keep going back to the FolioFN trading site to do my investing. My thought is that the sooner my money is working for me, the sooner I’m making money with it.

Institutional Investors

I don’t know that this really qualifies as a change, but it’s something that’s been a topic of conversation a lot over the last year. And that’s the idea that there are institutions who are investing in peer-to-peer investments. One of the biggest issues that many seem to have with this is that it’s meant to be peer-to-peer (it’s right in the name!) not institution-to-individual. That’s how the traditional loan process works, not peer-to-peer!

Ok. I get that, but I think there’s also an argument that as the peer-to-peer movement grows, there’s going to be an increasing scale of demand for the loans. And if the individual investing side doesn’t grow as quickly, there will be a lot of loans that won’t get funded. It’ll look bad for business, plus it will drive away potential borrowers. I think as investors, we need to recognize that if borrowers are being driven away because of a low funding rate, it means less opportunity to invest. What we need to hope for at this point, is that the institutional investors are held at bay, and used for filling those funding gaps rather than let run amok and run the individual investors off.

My Peer-to-Peer Investing Going Forward

Much like many of my other updates, which you can read on my Lending Club page which has links to those and other related articles, I just don’t see any good reason to stop or even scale back my investment in peer-to-peer investing. The return remains excellent, and defaults remain low. As I’ve mentioned in other updates, I believe some of that is just plain luck, and some of it is due to scale. I’m only working with a little over $1000 in the account, so it’s pretty easy to be a bit picky when selecting loans to invest in. If I were working with a lot more money in my account, I couldn’t be as picky, and would likely see my rate drop some and my defaults rise.

The whole idea of this experiment (it’s really gone beyond an experiment now) was to let the account organically grow. Invest a bit of seed and reinvest the principle payments and interest so that it’s all working to make more money. In short, I’m letting the miracle of compounding interest work for me. And so far, it’s working quite well.

What are your experiences with Peer-to-Peer investing? Is it working for you? Do you have questions before you dip your toes in? Let me know in the comments!

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